RBI tests blockchain technology behind Bitcoin

The RBI’s arm, Institute for Development and Research in Banking Technology (IDRBT), conducted the project using the technology behind Bitcoin in a trade application with banks and the National Payments Corporation of India (NPCI) participating too.ETCFO | Updated: January 17, 2017, 15:54 IST

Inspired by and in a boost to use the blockchain technology, RBI’s research arm has completed the first ever end-to-end test of the technology behind Bitcoin in a project involving regulators, banks, financial institutions and clearing houses. Blockchain technology was developed in 2008 for transaction of the virtual currency, bitcoin.

The RBI’s arm, Institute for Development and Research in Banking Technology (IDRBT), conducted the project using the technology behind Bitcoin in a trade application with banks and the National Payments Corporation of India (NPCI) participating too.

Blockchain is a public ledger that enables historical recording of all transactions that has occurred in a network in a way that it cannot be altered. Following the project, IDRBT last week released a white paper titled, ‘Applications of blockchain technology to banking and financial sector in India’.

What is a Blockchain technology?

It is a technology developed in 2008, to record the transaction of the virtual currency – Bitcoins.

A blockchain is a public ledger of all Bitcoin transactions that have ever been executed. The transaction takes place directly between the users without intermediaries. These transactions will get verified by network nodes – a real time verification and digital submission process. Nodes are computer connected to the Bitcoin network using a client that performs the task of validating and relaying transactions.

Everything is recorded in a public distributed ledger called blockchain, which uses bitcoin as its unit of account. It is constantly growing as ‘completed’ blocks are added to it with a new set of recordings. The blocks are added to the blockchain in a linear, chronological order. Each node gets a copy of the blockchain, which gets downloaded automatically upon joining the Bitcoin network. The blockchain has complete information about the addresses and their balances right from the genesis block to the most recently completed block.

‘Applications of blockchain technology to banking and financial sector in India’

In a foreword to the white paper, RBI deputy governor R Gandhi said that the banking industry world over was looking at the technology, which has the potential to disrupt financial business applications. The overall proof of concept provided a demonstration of use-cases and helped broaden the understanding of the technology and its potential to other real-life applications.

The technology partner for the project was New York-based MonetaGo, which provided the actual platform for test cases including payments with its proprietary enhanced information payments system (EIPS) and trade finance. In an interview to TOI, Jesse Chenard, CEO, MonetaGo, said that the project was believed to be the first ever end-to-end test of blockchain using existing banking protocols, including regulators, banks, financial institutions and clearing houses.

The whitepaper is a detailed overview of how blockchain technology will be integrated to the current system. It also states the advantages it will reap for the financial system of the country and the finance and non finance sectors.

Cost Saving through the blockchain technologyFraud Prevention: As BCT is built on the concept of sharing information across parties and consensus during transactions; it saves on reconciliation cost between banks and prevents losses because of documentary frauds.

Save costs on forex volatility: BCT used in cross border payments can help the consumers and banks to take advantage of the forex marketplace to get the best deal transparently from the market players. Since the transactions are processed in near realtime, the players need not suffer through the vagaries of currency volatility.

Save costs over delayed settlements: In case of a distributed payment network, BCT ensures the transaction settlement information is also processed simultaneously along with the payment messages. Since, the payments and settlements happen in realtime, the participating banks and financial institutions can enjoy reduced pressure on the treasury management to keep their settlement accounts well-funded.

Source: 'Application to blockchain technology to banking and financial structure in India' by Institute for Development and Research in Banking Technology, established by Reserve Bank of India

The Pilot Test

1: In a pilot conducted last year, ICICI Bank demonstrated that trade finance deals can be concluded instantly as against days using the technology.

2: In the starting of the year 2017, Yes Bank implemented a multi-nodal blockchain transaction to fully digitise vendor financing for Bajaj Electricals.

"Blockchain is one thing that has come out of Bitcoin which provides a lot of flexibility in terms of financial transactions. So, we need to study... how this Blockchain technology can be used in financial transactions where the entire data systems move to some more levels," Khan told reporters at an event organised by the Institute for Development and Research in Banking Technology (IDRBT), June

2016

How far is India from adopting the technology?

According to Chenard, it is still too early for the network effect to kick in for use of BCT. “Most bank experiments to date have been either with single institutions or with only a couple of parties to a transaction. And then again, those have been in closed sandbox environments that were deployed simply for testing purposes,” he said.

Other than the public Bitcoin, blockchain and a few other similar projects, there still haven’t been any actual productionised platforms, he added. “That is why it is one of our focuses here at MonetaGo. Until you have a platform that multiple parties can use and connect to, you can’t get a real network effect. As with any new technology, entrants rely on different platforms and methodologies and it will take some time for standards to evolve. That’s one of the reasons we are active with the Hyperledger Project.”

MonetaGo provides blockchain solutions to financial institutions and central banks. It also helps institutions identify and deploy software that integrates with existing banking systems, processes, and settlement mechanisms. “By using existing infrastructure and protocols instead of replacing them, we help our customers quickly get up-and-running without having to change their whole systems,” said Chenard.

According to Chenard, the basis of this regulator approach to BCT is largely around Know Your Customer requirements and the reporting of suspicious activity. “However, one of the interesting things for regulators when it comes to this new technology is its ability to provide greater visibility and transparency in real time into the actual transaction records than was previously possible. This innovation has the potential to bring about additional financial stability and market efficiency, which is why many regulators are taking a cautionary but optimistic approach,” he said.

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